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BURNET V. HARMEL, 287 U. S. 103 (1932)

U.S. Supreme Court

Burnet v. Harmel, 287 U.S. 103 (1932)

Burnet v. Harmel

No. 26

Argued October 20, 21, 1932

Decided November 7, 1932

287 U.S. 103


1. The income received by the lessor from an oil and gas lease, whether by way of an initial bonus or as royalties on the oil and gas subsequently produced by the lessee, was taxable, under the Revenue Act of 1924 not as gain from the "sale" of capital assets, but as ordinary income. Pp. 287 U. S. 105, 287 U. S. 112.

2. In prescribing a lower rate upon gain derived from sale of capital assets than upon income generally, the object of the statute was to relieve taxpayers from hardships resulting when long time increases of capital value are taxed in the year of their realization at high surtax rates, and to remove the deterrent effect of those hardships on conversions of capital investments. P. 287 U. S. 106.

3. Taxation of the lessor's receipts from an oil and gas lease as income does not ordinarily result in this hardship, aimed at by the statute. nor would such a lease be generally described as a "sale" of the mineral content of the soil, using the term either in its technical sense or as commonly understood. Pp. 287 U. S. 106-107.

4. The statute should be construed in the light of earlier rulings of this Court classing payments under mining leases as income, like payments of rent. P. 287 U. S. 108.

5. Although, by the law of the state where the land is situate, the execution of an oil and gas lease is deemed to pass immediately to the lessee the title to the oil and gas in place, the bonus payments are not therefore to be regarded as receipts from a sale of capital assets within the meaning of the Revenue Act, supra. Group No. 1 Oil Corp. v. Bass, 283 U. S. 279, distinguished. P. 287 U. S. 109.

6. A federal income tax act is an exercise of a plenary power of Congress, and is to be given a uniform construction of nationwide application except insofar as Congress, expressly or by necessary implication, makes its operation dependent on state law. P. 287 U. S. 110.

7. Section 208 of the Revenue Act of 1924 neither says nor implies that the determination of "gain from the sale or exchange of capital assets" is to be controlled by state law. In determining the applicability of the section to payments received under an oil and gas lease, the economic consequences of the leases are to be

Page 287 U. S. 104

considered, rather than any particular characterization of the payments in the local law. As the present leases do not differ in this respect from those where title to the oil and gas is said to pass only on severance by the lessee, it is immaterial that, under the local law, title is deemed to pass before severance. P. 287 U. S. 110.

8. In computing income of the lessor from an oil and gas lease, the depletion allowance of the Revenue Act of 1924, § 214a(9) is applicable to bonus payments. Pp. 287 U. S. 111-112.

56 F.2d 153 reversed.

Certiorari, 286 U.S. 536, to review the reversal of an order of the Board of Tax Appeals, 19 B.T.A. 376, which had sustained a deficiency assessment with respect to the respondent's income from oil and gas leases.

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